We are 64 & 60 years old, we both work and are refinancing our home. I say 30 year she says 12 year mortgage, at our age the shouldn't payments be low for retirement?
Going from fixed 5.75 to fixed 3.5 on 12 year and or 4 on 30 year. Does it really do us any good to pay off at our age?
Answers | 5
If you're thinking lower payments as you head into retirement would be easier to make, I'd encourage you that direction. You can always double up the payments to get it paid off if you like. The only advantage to taking the shorter term would be the lower interest rate. If you plan to pay off your home before you retire, then take the short term, low rate and run. If your payments will outlive your employment either way, the advantage of ~$100 (a guess) a month in interest savings probably doesn't outweigh the huge increase in monthly payment.
Either choice works, and either could be a good one for you. The decision you make today will have a huge impact on your lifestyle for the next many years either way.
If it were my money? Take the 30, save the payment difference each month in a good tax advantaged account, and when you do retire with a housing payment, you'll have the money in the bank (plus interest) to make payment for as long as you need.
It comes down to cash-flows and risks. The 30 year is going to have much lower payments, and if you will have guaranteed income (ie.SS, pension, etc) adequate to cover that for the extended term, it may make perfect sense to take the 30 year mortgage, even with the slightly higher rate, because of those lower payments and no need to accelerate paying back money when they will lend it to you so cheap.
However, and again, it comes down to the longer-term financial plan and cash-flows -- the 12 year mortgage will be paid off much sooner and then your family expenses will drop -- a *lot* for the rest of your lives.
We often model retirement in a couple of different phases - and walk though a "gap" analysis where we compute the level of spending, the level of guaranteed incomes (SS, pensions) and the gap between those guaranteed incomes and spending -- and that gap needs to be made up for out of drawdowns from retirement savings. The bigger the gap, the more retirement savings you need -- and the more *risk* you are taking (relying on investment income rather than guaranteed incomes) to cover that gap.
The difference between the 30 year and the 12 year, then, is mainly the *shape* of that gap:
With the 12-year -- the gap will narrow a *lot* 12 years from now with a paid off mortgage, though it may be a lot bigger in the short term.
With the 30-year -- the gap may be (a lot) smaller for the next 12 years, but it never really narrows (well, given life expectancies, at least one of you is actually still quite likely to outlive the 30 year mortgage).
Neither is right or wrong. They are both great opportunities to borrow at what are still historic lows. But you and your wife need to understand the trade-offs, what they mean, and how it affects your future cash-flows. In my experience, part of the issue underlying disagreements like this is different risk tolerances -- and an even bigger part of it is actually about communication -- you may not both be seeing the same things even when you're both looking at the same things. I encourage you to consider sitting down with a fee-only hourly financial planner to review not just the mortgages, but the whole financial picture and how those mortgage options factor into how you'll manage your future cash-flows, retirements, etc. A good planner will not only understand the numbers, but also facilitate the conversation between you and your wife to make sure you're not talking past each other. (Believe me. I work with couples on this sort of thing every day!).
In general, I would say that if there is no risk of you running out of money or cash flow in retirement, then it really doesn't make a big difference what you do. If you pay down the house quicker, you just have less money in your pockets. If you take longer to pay it off, then you have two options for the extra cash-flow: spend it (ie. ENJOY it) or save it.
Me personally, I like to encourage clients to pay down their debts as much as possible before, or early into, retirement. I just find it gives clients more flexibility and freedom in retirement, knowing they own everything and have no debts.